News

Summit theme seven - The customer in emerging markets

The rationale for investing in emerging markets has changed considerably in recent years. Whereas previously, multinationals entered these markets to gain access to cheap labour and resources, today emerging markets are viewed as the engine for future growth opportunities. “Most projections suggest an urban middle class in emerging markets of more than 1bn people,” said one speaker. “These markets are so big that even their niche segments present huge opportunities.”

Part of the challenge in emerging markets is to raise the living standards of a high proportion of the population. Although the middle class is now a major force and growing in number, the rural poor still make up a significant proportion of the population – up to 60% in China, for example. “China is very impressive as a producer,” said one speaker, “but can it be as impressive as a consumer?” To date, the consumer revolution in China does not appear to be happening quite as quickly as one might expect. In fact, household consumption has actually declined in the past 15 years.

In the past, multinationals have often made the mistake of taking a product developed with the western consumer in mind, making small modifications and then trying to sell it to emerging market customers. This approach has rarely resulted in a satisfactory outcome – either for the company or the customer. “You may only serve 10% of the market in an emerging market because that is all that can afford the product,” noted one speaker.

More recently, companies have been thinking much more deeply about product localisation. Rather than adapt western products, companies are developing new products locally, with local expertise. One producer of medical equipment described how his company had produced a portable electrocardiography device for the Indian market that cost one-tenth of the price paid in the US. As well as being suitable for other emerging markets, the speaker said that it could even be re-exported to the US, where it could be used by general practitioners seeking a quick and simple diagnostic tool. “Companies need to think local, but act global,” as one speaker put it.

Another speaker highlighted the importance of customer segmentation. ‘It’s a big mistake to treat these markets as homogenous,” he said. “They are highly segmented in terms of the diversity of their cultures and the stage of their economic development. The key is to develop a portfolio of brands that straddles these segments.”

In China, for example, the consumer market is huge and very diverse. “The market is very fragmented and regionalised,” said one speaker. It is also changing quickly. “The composition of the population is shifting from rural areas to cities. In the next 20 years, the urban population in China could reach 1bn. This is the largest migration in history.”

It is easy for companies to make mistakes when targeting consumers in emerging markets. One retailer described how his company offered patio furniture to Chinese customers in cities where the vast majority of the population lived in flats. Not surprisingly, they didn’t sell well. “You need to offer products that are relevant to local markets,” he explained.